Healthcare Exec Compensation Models Play Catch-up

This article appears in the November 2012 issue of HealthLeaders magazine.

With the Patient Protection and Affordable Care Act ushering in the pay-for-value era, healthcare organization compensation committees are scrutinizing executive compensation models to stay in step with new objectives. Though few external benchmark resources are available to help create the guiding metrics, boards continue to try to shift away from rewarding solely on organization-wide financial performance and move toward incentivizing for quality and patient satisfaction. Ultimately, though, fiscal goals still dominate when it comes to incentivizing the C-suite.

Physician compensation structures have opened the door for organizations to rethink their approach to paying and rewarding employees. Over the past few years at organizations nationwide physician compensation models have transitioned from fee-for-service to pay-for-performance with an eye toward encouraging better patient population health management. However, based on national compensation surveys, it would appear as though healthcare executive compensation structures have yet to make a similar structural shift. But that change is under way.

Kathryn Hastings, managing director and practice leader for Sullivan, Cotter and Associates' executive compensation practice, says the transition is happening slowly as boards assess which metrics to tie to incentives in order to encourage or maintain alignment. Boards are feeling the pressure from both the public and the government to reduce organization costs, she says, but they must weigh that against the need to compensate fairly to attract and retain key leaders.

"To create new quality-centric models, what the boards and the industry need—and they are beginning to get—are really good benchmarking resources, such as those from Truven Health Analytics on performance objectives and other performance data. That way they aren't just benchmarking against themselves but against everyone else—and even when this data comes out, it's still going to be challenging to apply it because some of it will depend on an organization's payer mix among other factors," Hastings says.

Sally LaFond, a senior consultant with Sullivan, Cotter and Associates, says she sees new measures, including quality, safety, and patient satisfaction, being added throughout the C-suite incentive structure, though generally incentives are still being applied annually instead of long-term.

"Boards are now weighting incentive goals for the CEO and other members of the team. However, we're not seeing the move away from annual incentive goal setting; rather, we're seeing the board take an additional interest in how to structure and add in long-term performance planning goals," says LaFond.

A survey by another consultancy, INTEGRATED Healthcare Strategies' Spring 2012 Salary Increase, Incentive and Benefit Updates shows that of the 75% of respondents that have incentive plans for executives, approximately 25% said the plans will be changed this year. Another 38% of hospitals and health systems will use physician alignment as a criterion in their incentive plans.

Using weighted incentives to hit goals

The Christ Hospital Health Network in Cincinnati has changed how it approaches incentivizing executives. Five years ago, the organization moved away from rewarding executives based solely with base pay and instead began structuring a weighted incentive and bonus plan that rewards the attainment of strategic goals.

"Physician compensation models changed, and our hospital reimbursement model changed, too. We knew to reach our goals it would take a tripartite effort so there had to be alignment in the compensation models between the board, the administration, and the medical staff," says Rick Tolson, vice president and chief administrative officer at the organization, which includes The Christ Hospital, a 555-licensed-bed, nonprofit acute care facility, and more than 90 outpatient and physician practice locations. The organization began making structural changes to how everyone is compensated, starting with the CEO and on down to the rest of the staff.

The board of directors established a charter for the compensation committee that included roles, accountability, and deliverables, and then called upon a consultant from the Hay Group, a global management consulting firm, to help establish reasonable executive base salaries and structure a new incentive plan, Tolson explains.

The Christ Hospital's initial approach toward establishing total cash compensation (base salary plus annual incentives and bonuses) for its CEO and other members of the C-suite followed the industry's best practices; however, where the organization made new inroads was in creating a metric-driven annual and long-term incentive plan.